Here’s a puzzle. Roughly a third of the $1.8 trillion in superannuation savings is invested in the ordinary shares associated with companies listed on the Australian Securities Exchange. Yet these businesses represent only half the total equity value of corporate Australia, according to Barclays chief economist Kieran Davies. The remaining half are unlisted private companies that have little to no representation in most portfolios.

Gauging the relative significance of “public" as opposed to “private" equities is an inherently difficult exercise, given that unlisted businesses do not get regularly revalued. But if you were creating a portfolio spanning cash, bonds, equities and property, the allocation to private businesses might in theory be as large as your investment in listed equities on a pure market capitalisation basis. In practice, the converse is true. And the investments that do exist are heavily biased towards big private equity funds that specialise in picking up mature businesses that are not ordinarily the “disruptive" innovators.

The opportunity cost could be significant: the highest returns in a company’s life cycle are normally realised during its early years. In contrast, ASX companies tend to be more established and definitionally lower-growth concerns.

There are, of course, good reasons for the portfolio disconnect between listed and unlisted corporate equities. Most private enterprises are, like homes, wholly owned by their founding families. The equity is, therefore, notionally indivisible: as with residential property, it is not easy to go out and cost-effectively buy small fractional ownership interests in thousands of unlisted companies.

And because these businesses are small and unlisted, the equity is inherently illiquid, with a paucity of reliable information on how much it is actually worth.

Diversity a challenge

This creates challenges both for investors with a latent interest in getting a well-diversified portfolio of unlisted equities and for ambitious owners seeking external funding other than debt to grow their companies.

The power of equity as a form of finance is that it shares in both the risks and returns. Equity is only expensive if the business succeeds; it is costless for issuers if it goes bust. Debt, on the other hand, creates an obligation to pay lenders interest irrespective of the business’s ups and downs.

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Company Profile

The lack of transparency around unlisted equities, and the information asymmetries between owners and investors, has resulted in a widely accepted deficiency in “venture capital" for early-stage businesses that can produce the best returns (and correspondingly highest risks).

There are, however, a handful of groups trying to address this lacuna. One is the ubiquitous media presence Mark Carnegie, who has an eponymous TV series, Carnegie’s Den, broadcast by Sky Business. Another is the $60 million AirTree fund established this year by seasoned entrepreneurs Daniel Petre and Craig Blair, which will target tech start-ups.

OneVentures

A more discreet yet equally influential player on the Australian venture capital scene is OneVentures, which raised $40 million for its first fund in 2010 and a further $30 million via subsequent co-investments.

OneVentures reports a mark-to-market 20 per cent annualised return across its nine investments to date, and launched a second fund in March, which has already secured $60 million in commitments.

Its funds have been supported by more than 55 high net worths and family offices, including Peter Gammell, a director of
Seven West Media
; Mark Nelson, executive chairman of the $2 billion hedge fund
Caledonia
; Simon Moore, the Australian head of the Carlyle private equity firm; and Roger Massy-Greene, a wealthy resources investor.

The management team has deep operational experience. It includes
Michelle Deaker
, who helped create Australia’s prepaid cards market and is a director of Seven West Media;
Paul Kelly
, who founded Gemini Genomics, a US$350 million business that looked for links between genes and human health; and
Dean Hawkins
, a Leighton Contractors and Ten Network director who was global CFO of adidas between 1996 and 2000, when its value rose from €1.5 billion to €8 billion.

Gammell says he has decided to back the second vehicle “after seeing the performance of the OneVentures team in deal origination, selection, and management" through his investment in the first fund.

The second vehicle has a later-stage orientation and will build a portfolio of emerging Australian companies across healthcare, education, mobile, media, cloud, security, machine learning, robotics and food security.

Another investor in the first fund, Mark Nelson, says “the quality of the businesses OneVentures has assembled over the past four years is one of the best venture capital portfolios I’ve seen in this country".

A celebrated holding is the “nanoneedle" company Vaxxas, which can deliver vaccines via patches and has struck a deal with the global pharmaceutical company Merck.

Deaker, OneVentures chief executive, says she wants to shift the new fund away from the more competitive start-up segment to concentrate on development-stage companies with revenues of $5 million or more that are looking to source funding via second- and third-round capital raisings. “These are businesses that are approaching profitability that require capital to scale and fuel future growth," she says.

Later-stage businesess

Deaker and Gammell both point to the fact that significantly more money is being allocated to start-ups in Australia than later-stage businesses which are still young and experiencing strong growth, but which have demonstrably lower execution risks.

“There’s almost no capital available for B and C round venture investments," Deaker says, citing a recent industry study that found that while there are more than 20,000 “investable companies" with revenue over $10 million in Australia, only 1.4 per cent have venture commitments.

Economists have known for years that the single most important driver of long-term prosperity is innovation and the productivity it spawns through efficiency gains. But pioneers need debt and equity capital to execute new ideas. In this context, there is a case that our portfolios are significantly underexposed to the one-half of corporate Australia that is not yet listed on the ASX.